Question 1

All of the following are methods available to a corporation that desires to repurchase stock EXCEPT

Accepted Answer

A) offering to employees who own an interest in the firm. 
B) open market. 
C) tender offer to all existing stockholders. 
D) offer to one or more major stockholders on a negotiated basis. 
A) offering to employees who own an interest in the firm. 
B) open market. 
C) tender offer to all existing stockholders. 
D) offer to one or more major stockholders on a negotiated basis.

Question 2

A firm's dividend policy includes two basic components: the dividend payout ratio and the profit retention ratio.

Accepted Answer

A) True 
 B)False

Question 3

Cyberco Corporation has 5 million shares of stock outstanding.Cyberco's after-tax profits are $15 million and the corporation's stock is selling at a price-earnings multiple of 10,for a stock price of $30 per share.Cyberco management issues a 25% stock dividend. 
a.Calculate Cyberco's earnings per share before and after the stock dividend. 
b.Suppose an investor owns 100 shares of Cyberco before the stock dividend.Use the price earnings multiple to estimate the value of the investor's holdings both before and after the dividend. 
c.Comment on the results of the stock dividend for current shareholders.

Accepted Answer

a.Before: EPS = $15 million /52 million

Question 4

The higher the dividend payout ratio,the more a company must rely on external financing.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is true if dividend policy is irrelevant?

Accepted Answer

A) Perfect capital markets exist. 
B) The clientele effect exists. 
C) The information effect exists. 
D) Tax deferral on capital gains exists. 
A) Perfect capital markets exist. 
B) The clientele effect exists. 
C) The information effect exists. 
D) Tax deferral on capital gains exists.

Question 6

Which of the following statements would be consistent with the residual dividend theory?

Accepted Answer

A) Wealthy investors prefer corporations to defer dividend payments because capital gains produce greater after-tax income. 
B) Dividends are more certain than capital gains. 
C) Dividends should only be paid if a firm has profits in excess of the amount needed to finance the current year's capital investments. 
D) Investors are indifferent whether stock returns come from dividend income or capital gains income. 
A) Wealthy investors prefer corporations to defer dividend payments because capital gains produce greater after-tax income. 
B) Dividends are more certain than capital gains. 
C) Dividends should only be paid if a firm has profits in excess of the amount needed to finance the current year's capital investments. 
D) Investors are indifferent whether stock returns come from dividend income or capital gains income.

Question 7

If John owns 5% of XYZ corporation before its 2 for 1 stock split,John will own 5% of XYZ corporation after the stock split as well.

Accepted Answer

A) True 
 B)False

Question 8

Outpost has 2 million shares of common stock outstanding; net income is $300,000; the P/E ratio is 9; and management is considering an 18% stock dividend.What will be the expected effect on the price of the common stock? If an investor owns 300 shares in the company,how does this change his total value? Explain.

Accepted Answer

Before dividend: @#IMG-DLM& Current price $1.35 =

Question 9

A stock dividend differs from a stock split because in a stock split,the par value of the company's stock is reduced,while the par value remains the same after a stock dividend is paid.

Accepted Answer

A) True 
 B)False

Question 10

Dividend changes may be used by management as a credible communication tool to signal investors about future earnings under which of the following dividend policy theories?

Accepted Answer

A) the clientele effect 
B) the residual dividend theory 
C) the information effect 
D) the expectations theory 
A) the clientele effect 
B) the residual dividend theory 
C) the information effect 
D) the expectations theory

Question 11

An investor who pays no tax would be more likely to accept the view that high dividends increase stock values rather than the view that low dividends increase stock values.

Accepted Answer

A) True 
 B)False

Question 12

AFB Corp.Declared a $1.00 dividend on January 5th,with an ex-dividend date of January 19th,a record date of January 21st,and a payment date of March 15th.Doug purchased AFB stock on January 6th.

Accepted Answer

A) Doug will not receive the dividend because he purchased the stock after the declaration date. 
B) Doug will not receive the dividend because he purchased the stock prior to the record date. 
C) Doug will receive the dividend if he still sells his stock on January 20th because he owned the stock on the ex-dividend date. 
D) Doug will receive the dividend if he still owns the stock on January 21st,even if he sells the stock before the payment date. 
A) Doug will not receive the dividend because he purchased the stock after the declaration date. 
B) Doug will not receive the dividend because he purchased the stock prior to the record date. 
C) Doug will receive the dividend if he still sells his stock on January 20th because he owned the stock on the ex-dividend date. 
D) Doug will receive the dividend if he still owns the stock on January 21st,even if he sells the stock before the payment date.

Question 13

A stock repurchase may be viewed as

Accepted Answer

A) a dividend decision when the firm has excess cash. 
B) a financing decision when the firm wants to alter its capital structure. 
C) an operating leverage decision. 
D) both A and B. 
A) a dividend decision when the firm has excess cash. 
B) a financing decision when the firm wants to alter its capital structure. 
C) an operating leverage decision. 
D) both A and B.

Question 14

The clientele effect does not imply that either high or low dividends are optimal,rather that firm's should not make significant and arbitrary changes in their existing dividend policy.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is the most valid reason to split a stock that has a market price of $110 per share?

Accepted Answer

A) conserve cash 
B) reduce the market price to a more popular trading range 
C) obtain additional capital 
D) increase investor's net worth 
A) conserve cash 
B) reduce the market price to a more popular trading range 
C) obtain additional capital 
D) increase investor's net worth

Question 16

Shareholders may prefer a share repurchase program to dividends because dividends are subject to taxation and increasing value per share due to repurchase programs is tax deferred.

Accepted Answer

A) True 
 B)False

Question 17

Grainery Distillers,Inc.is experiencing high demand for its products and high growth rates.The company just reported earnings per share of $5 for the most recent year and has many positive NPV projects to fund.One vice president wants to pay a dividend of $5 per share,arguing that this will maximize shareholder value.You argue that a much smaller dividend will maximize value.Your argument may be based on

Accepted Answer

A) the bird-in-the-hand theory. 
B) the residual dividend theory. 
C) the information effect. 
D) the very high agency costs of the corporation. 
A) the bird-in-the-hand theory. 
B) the residual dividend theory. 
C) the information effect. 
D) the very high agency costs of the corporation.

Question 18

According to the expectations theory,the actual dividend must equal the expected dividend,or else the stock price will decrease after the dividend amount is announced.

Accepted Answer

A) True 
 B)False

Question 19

Statutory restrictions on dividend payments include all of the following EXCEPT

Accepted Answer

A) if liabilities exceed assets. 
B) if the amount of the dividend exceeds the firm's retained earnings. 
C) if the dividend is being paid from capital invested in the firm. 
D) if,because of the dividend payment,the firm intends to sell new common stock to fund its capital budget. 
A) if liabilities exceed assets. 
B) if the amount of the dividend exceeds the firm's retained earnings. 
C) if the dividend is being paid from capital invested in the firm. 
D) if,because of the dividend payment,the firm intends to sell new common stock to fund its capital budget.

Question 20

Stock dividends

Accepted Answer

A) decrease stock prices because no cash goes to shareholders but companies pay transactions costs. 
B) may increase stock prices if the dividend is used to maintain on optimal trading range for the common stock. 
C) may increase stock prices if investors perceive the dividend as containing favorable information about the firm's future prospects. 
D) Both B and C are true. 
A) decrease stock prices because no cash goes to shareholders but companies pay transactions costs. 
B) may increase stock prices if the dividend is used to maintain on optimal trading range for the common stock. 
C) may increase stock prices if investors perceive the dividend as containing favorable information about the firm's future prospects. 
D) Both B and C are true.

All of the following are methods available to a corporation that desires to repurchase stock EXCEPT

A firm's dividend policy includes two basic components: the dividend payout ratio and the profit retention ratio.

The higher the dividend payout ratio,the more a company must rely on external financing.

Which of the following is true if dividend policy is irrelevant?

Which of the following statements would be consistent with the residual dividend theory?

If John owns 5% of XYZ corporation before its 2 for 1 stock split,John will own 5% of XYZ corporation after the stock split as well.

A stock dividend differs from a stock split because in a stock split,the par value of the company's stock is reduced,while the par value remains the same after a stock dividend is paid.

Dividend changes may be used by management as a credible communication tool to signal investors about future earnings under which of the following dividend policy theories?

An investor who pays no tax would be more likely to accept the view that high dividends increase stock values rather than the view that low dividends increase stock values.

AFB Corp.Declared a $1.00 dividend on January 5^th,with an ex-dividend date of January 19^th,a record date of January 21^st,and a payment date of March 15^th.Doug purchased AFB stock on January 6^th.

A stock repurchase may be viewed as

The clientele effect does not imply that either high or low dividends are optimal,rather that firm's should not make significant and arbitrary changes in their existing dividend policy.

Which of the following is the most valid reason to split a stock that has a market price of $110 per share?

Shareholders may prefer a share repurchase program to dividends because dividends are subject to taxation and increasing value per share due to repurchase programs is tax deferred.

According to the expectations theory,the actual dividend must equal the expected dividend,or else the stock price will decrease after the dividend amount is announced.

Statutory restrictions on dividend payments include all of the following EXCEPT

Stock dividends

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters

Exam 13: Dividend Policy and Internal Financing

All of the following are methods available to a corporation that desires to repurchase stock EXCEPT

A firm's dividend policy includes two basic components: the dividend payout ratio and the profit retention ratio.

The higher the dividend payout ratio,the more a company must rely on external financing.

Which of the following is true if dividend policy is irrelevant?

Which of the following statements would be consistent with the residual dividend theory?

If John owns 5% of XYZ corporation before its 2 for 1 stock split,John will own 5% of XYZ corporation after the stock split as well.

A stock dividend differs from a stock split because in a stock split,the par value of the company's stock is reduced,while the par value remains the same after a stock dividend is paid.

Dividend changes may be used by management as a credible communication tool to signal investors about future earnings under which of the following dividend policy theories?

An investor who pays no tax would be more likely to accept the view that high dividends increase stock values rather than the view that low dividends increase stock values.

AFB Corp.Declared a $1.00 dividend on January 5th,with an ex-dividend date of January 19th,a record date of January 21st,and a payment date of March 15th.Doug purchased AFB stock on January 6th.

A stock repurchase may be viewed as

The clientele effect does not imply that either high or low dividends are optimal,rather that firm's should not make significant and arbitrary changes in their existing dividend policy.

Which of the following is the most valid reason to split a stock that has a market price of $110 per share?

Shareholders may prefer a share repurchase program to dividends because dividends are subject to taxation and increasing value per share due to repurchase programs is tax deferred.

According to the expectations theory,the actual dividend must equal the expected dividend,or else the stock price will decrease after the dividend amount is announced.

Statutory restrictions on dividend payments include all of the following EXCEPT

Stock dividends

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters

AFB Corp.Declared a $1.00 dividend on January 5^th,with an ex-dividend date of January 19^th,a record date of January 21^st,and a payment date of March 15^th.Doug purchased AFB stock on January 6^th.